PROBLEM 1: Suppose you manage a hedge fund that holds a large portfolio of stocks. The fund also hedges those stocks with stock index futures, and participates in stock index arbitrage. a) In the first two rows of the grid below, show your stock and forward (or futures) transactions and the corresponding cash flows, using symbols (S., St, etc.) for the cash flows. Be sure to indicate whether each instrument is long or short and include (+) and (-) signs on your cash flows. b) What synthetic instrument (stock, forward, bond; also state whether it is long or short) have you created with the combined positions in Part a)? [Hint: Remember that F0,t = Soer] Is it long or short? c) In the third row of the grid below, show what instrument you would use to arbitrage the combined positions in the first two rows (i.e., the synthetic instrument in Part b) above). Also show the corresponding cash flows for that instrument, using symbols (So, St, etc.) for the cash flows. Be sure to indicate whether each position is long or short and include (+) and (-) signs on your cash flows. Then complete the fourth row of the grid. Transaction: Time 0 cash flows: Time t cash flows: Total: PROBLEM 1: Suppose you manage a hedge fund that holds a large portfolio of stocks. The fund also hedges those stocks with stock index futures, and participates in stock index arbitrage. a) In the first two rows of the grid below, show your stock and forward (or futures) transactions and the corresponding cash flows, using symbols (S., St, etc.) for the cash flows. Be sure to indicate whether each instrument is long or short and include (+) and (-) signs on your cash flows. b) What synthetic instrument (stock, forward, bond; also state whether it is long or short) have you created with the combined positions in Part a)? [Hint: Remember that F0,t = Soer] Is it long or short? c) In the third row of the grid below, show what instrument you would use to arbitrage the combined positions in the first two rows (i.e., the synthetic instrument in Part b) above). Also show the corresponding cash flows for that instrument, using symbols (So, St, etc.) for the cash flows. Be sure to indicate whether each position is long or short and include (+) and (-) signs on your cash flows. Then complete the fourth row of the grid. Transaction: Time 0 cash flows: Time t cash flows: Total